Taking Stock

Five months after taking the helm as chief executive, Delhaize Group’s Frans Muller told analysts and shareholders that many of the retailer’s problems at its U.S. stores (Food Lion and Hannaford) have been “self inflicted.”

Muller made those comments shortly after the Brussels-based retailer announced its fourth quarter earnings on March 13. At its U.S. stores, underlying operating margin dipped slightly from 3.6 percent to 3.4 percent in the fourth quarter, which Muller said was caused by previously announced price investments. A month earlier, Delhaize announced that its overall U.S. fourth quarter sales rose 2.6 percent to $4.3 billion and comps increased by 2.8 percent.

In his conference call to financial analysts, the Dutch born Muller said that continuing to rebuild market share and increase profitability were priorities, adding that greater emphasis would be placed on growing private label sales at both of its U.S. banners

The former Metro AG executive stated that efficiency and speed were important components in delivering market share increases and that the company would focus on core properties that have the greatest profit potential. That would seem to indicate that its fledgling Bottom Dollar Foods extreme value unit would be receiving a more minor corporate commitment.

“It’s obvious that Delhaize Group has to address a couple of real issues,” Muller said. “Our profitability at Delhaize America and Delhaize Belgium has eroded in recent years. It’s to a high degree self-inflicted as we had to step up our price investment and promotional activities in order to maintain our market share and improve our revenue performance.”

Muller acknowledged that Food Lion’s “repositioning” effort over the past three years has resulted in new sales momentum, but the “overall improvement in customer perception has not been enough.”

He added that, despite Food Lion’s improvements which has stabilized some of the problems at the Salisbury, NC-based chain, the large regional chain still trails its competitors in sales per square foot comparisons and total spend at its stores. Muller also noted that Food Lion will transition from “vendor-driven to customer-driven assortments in center store” that will result in a 50 percent turnover in assortments at its stores.

At its more profitable Hannaford unit, Delhaize is committed to maintaining price investments and said that its “Hannaford To Go’ web-driven shopping alternative will be increased with 10 new “click-and-collect” points to be added in 2014.

As part of the revamped center store plan at Food Lion, Muller noted that of the19,000 SKUs that have been reviewed in center store departments, 6,700 items will be discontinued and 3,330 new items will be added, resulting in an 18 percent reduction overall. The project should be completed by the end of the year. He added that the assortment changes would not hurt profit, as more relevant consumer selection and the increase in higher margin from private label offerings would offset national brand reduction.

As part of its ongoing plan, 77 Food Lion stores will be testing and refining its “easy, fresh and affordable” brand and store format. Muller also stated that Food Lion currently captures only 18 percent of its shoppers’ total food spend, compared to around 26 percent for a selected group of its peers including Bi-Lo, Harris Teeter, Publix, and Giant/Carlisle. “We are very optimistic we can narrow this gap,” he said.

According to the 52 year-old industry veteran, whose entire career has been spent in Europe and Asia, Food Lion maintains the number one or number two rank in 72 percent of its stores. The remaining 28 percent of its supermarkets would be reviewed this year to determine “can win or cannot win” status.

At Hannaford, Muller explained that while that division has maintained its market share, sales and profitability are threatened as competitors like Wal-Mart, Market Basket, Whole Foods and Wal-Mart are adding stores in New England. Delhaize is attempting to defend itself by continuing its price investment program, expanding the “Hannaford to Go” web-driven option and by also differentiating its brand, including its current ongoing assortment review. Those assortment changes will be less intensive than the comparable program at Food Lion.

As for Bottom Dollar Food, Delhaize’s price-impact stores whose go to market plan was restructured in 2010, it appears that format is now a secondary initiative. No cap-ex plan was discussed during the conference call and no new store openings were mentioned. Muller’s only comments about the struggling discount division was that Bottom Dollar “made tremendous progress in 2013, and the team is completely engaged to make sure that they make the next steps in making this business model more profitable. That’s the task at Bottom Dollar Food.”

‘Round The Trade

Excellent speech last month by Jim McCaffrey III, owner of McCaffrey’s Markets. Jim told about 100 trade associates at the March meeting of the Mid-Atlantic Food Trades Organization (MAFTO), held at Williamson’s in Doylestown, PA, that his upscale brand of retailing has created a clear separation between his stores and those of his competitors. “There’s been a huge change in the marketplace over the past five years, but we have continued to focus on the things we do best – understand our customers so we can delight them, pay close attention to detail and acknowledge that our ultimate advantage is our people,” he noted. McCaffrey added that his company’s significant investment in training has also paid handsome dividends. The four store group, based in Langhorne, PA employs about 65 percent of its store level associates on a full-time basis (most chains operate with almost an opposite ratio) and the independent’s focus and execution in its perishable departments (including its prepared foods and commissary operation) has proved to be a significant advantage for his company. Other areas where McCaffrey’s Markets has created differentiation between itself and its competitors are in its strong relationship with the communities it serves (I can attest that there’s virtually no civic or non-profit organization that McCaffrey’s won’t help) and also by promoting new and healthy food options to its customers. Jim asserted that merchandising and marketing organics, gluten free and non-GMO items more aggressively has increased store sales while also helping to educate its consumers about wellness and lifestyle. I’ve known Jim McCaffrey for many years. He’s not only one of the best merchants in the country, he’s a man of great vision, passion and philanthropy…and there’s ever more Ahold USA news: Erik Keptner, the popular and hard working executive VP-marketing for AUSA will be shifting jobs at the big retailer. A member of the rare “30 pound brain” club, Keptner will now become senior VP-sales and merchandising for the company’s Giant/Carlisle unit and Jan Van Dam, current executive VP-supply chain and e-commerce, who joined AUSA from parent company Royal Ahold 14 months ago, will add marketing to his leadership duties. Joining AUSA from Hershey to head up marketing as a senior VP is Amy Hahn. Hahn, who will officially join the big merchant on April 28, spent more than 20 years with the big Central PA chocolate maker, most recently as global VP/general manager for direct retail and licensing where she led a 700 person cross-functional team, expanding Hershey’s retail presence across North America, Asia and the Middle East. The timing of this announcement is kind of ironic, given the fact that Keptner was inducted into the Shopper Marketing Hall of Fame just a week earlier. In other personnel moves, departing AUSA will be the well-liked Jeff Beaulieu, VP-sales and merchandising for the Giant/Carlisle division. Also at AUSA, C&S Wholesale Grocers, currently the retailer’s largest outside distributor, will now be assuming inventory management responsibilities from Ahold USA for general merchandise and health and beauty care items at American Sales Company (ASC) in Buffalo, NY. This move will leverage C&S’s expertise and provide Ahold USA with new efficiencies and a simpler operating model. Ahold USA will still own and operate the ASC warehouse, while C&S will be responsible for purchase order creation, inventory levels, and overall service levels. Inbound logistics will be managed jointly with Ahold USA transportation. Specifically, Ahold USA will continue to maintain inventory management responsibility for purchase order creation and inventory management responsibility for seasonal merchandise and pharmacy. C&S will work closely with the Ahold USA replenishment and merchandising teams in these efforts. Corporately, Ahold CEO Dick Boer delivered his address to the retailer’s shareholders at the company’s annual general meeting held in Zaandam, the Netherlands on April 16. Putting a positive spin on what has been a somewhat rocky 12 months for the international merchant, Boer said “it is one of the most exciting times ever to be a retailer.” He expressed continued faith in Ahold’s “Reshaping Retail” strategy, while also acknowledging the challenging market conditions in which “customers remain focused on value and were cautious in their spending.” Boer noted that Ahold’s investment in its “fresh” offerings remains a “key area for us to differentiate ourselves versus the competition. It is where real loyalty starts with our customers.” He also touted Ahold’s “omni-channel” vision, which combines traditional stores and online shopping that will “provide a seamlessly connected online and offline experience.” In the U.S., Boer noted that Ahold will increase its grocery “Pick Up Points (PUP)” to at least 200 by the end of the year and will open a new Peapod warehouse in Jersey City, NJ this summer. Other U.S. initiatives include the construction of a 100,000 square foot greenhouse (in partnership with BrightFarms) that will allow Giant/Landover customers a wider and fresh selection of produce and a continued focus on food safety…for those who were expecting major changes at A&P after former CEO Sam Martin was dispatched in January, think again. The fumblin’, stumblin’ and bumblin’ Montvale, NJ retailer stayed “in house” with its new chief executive choice, elevating Paul Hertz from chief operating officer. Hertz joined A&P in 2010 and his career path closely dovetails with other former Yucaipa linked executives (including Martin) who have toiled at other former Yucaipa controlled entities such as Fred Meyer and Wild Oats. Hertz will report to Greg Mays, the Tea Company’s chairman (and another Yucaipa legacy exec). Mays said, “Paul and his team made significant progress in 2013 in improving both the company’s operating and financial results. We believe that 2014 also holds great promise for further accomplishments; we expect to capitalize and improve upon last year’s performance, which will result in a stronger company and greater value for the company’s stakeholders. Paul’s mix of operational, managerial and retail experience makes him the ideal candidate to lead the company as we build on our operational momentum and focus on activities that will achieve projected sales results with a special focus on the needs of the customer.” “Significant progress?” “Great promise?” Is Mays talking about the status of one of his previous employers? Not going outside the company for a new CEO indicates one of two things to me: either A&P found little success in being able to attract a skilled and creative executive with game-changing ability, or it remains very content to continue with its current lineup (executives Christopher McGarry and Nirup Krishnamurthy were also promoted to chief administrative officer and chief strategy officer respectively) of executives who are better positioned to either sell most of its stores or perhaps re-enter bankruptcy. Either way, A&P remains a train wreck. However, we did find one admirable skill that the once iconic retailer possesses: its ability to detect internal fraud. A&P acknowledged that it tipped off federal authorities about a seven figure ticket selling scheme run by former senior VP of marketing John Moritz. It appears Moritz used company funds to buy concert, theatrical and sporting events tickets. And we’re not talking about peddling tickets to a Reading Phillies game either. Moritz’s ticket scheme arranged for A&P to purchase more than 7,000 tickets to major events such as the 2011 Super Bowl, concerts featuring U2, Lady Gaga and Bon Jovi as well as the Broadway hit “The Book Of Mormon.” Last month, Moritz pled guilty to one count of wire fraud in Newark, NJ. He faces as much as 20 years in the slammer and up to $250,000 in fines when he is sentenced on July 9. I wonder if Moritz can score me some tickets to the June 13 Rolling Stones show in Paris?….not quite yet at the A&P level of ineptitude (but gaining ground) is Canadian owned Natural Markets Food Group. After bombing with its Fresh & Green’s operation in Maryland (those stores were former A&P/Super Fresh units, so maybe there’s a curse in place), the retailer/restaurant firm is now busily working on expanding its organic entity, Mrs. Green’s. Last month we reported on the sluggish start at the chain’s first Virginia store in Fairfax (by our estimates doing only about $100K per week). Now several sources have informed us that the Virginia Department of Alcoholic Beverage Control confiscated about $15,000 worth of alcoholic products from the Fairfax unit because the store’s alcohol license application was still pending. While Mrs. Green’s was not selling the alcohol and clearly marked the merchandise “not for sale,” apparently having it on premises is a violation of ABC rules. I have a feeling Mrs. Green’s ain’t getting their booze back and their license may take a bit longer to get approved. A better Mrs. Green’s opening occurred late last month in West Windsor, NJ. The company’s newest unit featured improved merchandising and a better trained staff. However, like many of its underperforming new stores, the proof for Mrs. Green’s is in its ability to demonstrate to the affluent customer base it seeks that it can execute consistently at store level. So far that high-level of in-store execution has fallen way short. And with even more stores being added to its expansion roster including high rent areas in Washington, DC, New York City and another Chicago unit, Mrs. Green’s attempt at gaining high rewards thus far has only yielded high risk…it seems there’s never be a dull moment at Wal-Mart and, according to Businessweek, new CEO Doug McMillon stated at a company meeting that the chain’s out of stock issues represented a “$3 billion opportunity.” Bill Simon, president of Wal-Mart’s U.S. operation made a similar statement about a year ago, only to be overridden by company flak David Tovar, who claimed that the Behemoth was very pleased with its in-stock conditions. To even the greenest of trade observers, Wal-Mart’s out-of-stock problems are obvious and huge and have been that way for the past three years. The solution is relatively simple, even for a high volume retailer like Wal-Mart: hire more labor, train them better and pay them enough so they not only stay at their jobs, but they actually like their employer. Wal-Mart last month also rolled out an online tool that allows its customers to compare prices of 80,000 food and household items to those of its competitors. The new software is called “Savings Catcher” and has been rolled out in seven major markets including Charlotte, Atlanta, San Diego, Dallas, Minneapolis, Huntsville, AL and Lexington, KY. One Wal-Mart decision that seems to make a lot of sense is its partnering with Wild Oats, no longer a retailer, but a line of organic products. Originally introduced in 1987, Wild Oats will relaunch at Wal-Mart starting this month with a new, more affordable price point covering a broad variety of categories – from salsa and pasta sauce to quinoa and chicken broth. Both companies said that customers will save 25 percent or more when comparing Wild Oats to national brand organic products. “We know our customers are interested in purchasing organic products and, traditionally, those customers have had to pay more,” said Jack Sinclair, executive VP-grocery at Wal-MartU.S. “We are changing that and creating a new price position for organic groceries that increases access. This is part of our ongoing effort to use our scale to deliver quality, affordable groceries to our customers.” “By partnering with Wal-Mart, Wild Oats is starting a movement that makes it easier than ever for customers to access affordable organic and natural products,” said Tom Casey, CEO of Wild Oats. “Our availability at Wal-Mart will allow us to finally pass along scalable savings directly to consumers. We are reinvigorating our brand by bringing great tasting Wild Oats products to more customers than ever before. In a “strange bedfellows” kind of way, the Wild Oats operation is partly-owned by a unit of Yucaipa Cos., which directly competes against Wal-Mart with its A&P (Pathmark, Super Fresh, etc.) and Fresh & Easy Banners…expanding from Europe to the U.S. will be huge German retailer Lidl, Aldi’s main rival. Lidl is said to be looking to open as many as 100 stores on the East Coast beginning in 2018 (the original entry date was pushed back from 2015). It has established a U.S. office in Arlington, VA, headed by its Irish leadership team, who are currently gathering data for the expected launch. In Europe, Lidl is a real powerhouse, running nearly 10,000 small discount units in 28 countries. However, as many European retailers have learned (Tesco, Carrefour, J. Sainsbury, Marks & Spencer, Leedmark, etc.), operating in the U.S. poses different and challenging realities. And Lidl will be entering the United States during one of the most competitive, overstored and economically unstable periods in the history of food retailing…speaking at last month’s UBS Global Consumer Conference in Manhattan, Kroger CFO J. Michael Schlotman said the retailer plans to enter at least one new market in the near future, “We are going down the path of picking one new market to enter organically. We’ve been engaged in that process since October, and we’ve essentially decided where we’re going to go, though it will be awhile before we go public,” Schlotman noted, adding that Kroger is not sharing more specifics because of competitive reasons and the fact that the price of real estate always increases if they know you’re looking. He also said that growing “fill-in” markets was on Kroger’s agenda. “We have identified several markets, what we call fill-in markets, where our sales trends are strong, our results and our ‘Customer 1st’ surveys we do are strong, so we know that we’re connecting and resonating with the customers in those markets where we’re just under-stored compared to other markets where we have a lot higher market share. We’ve dedicated most, if not all, of this increased capital to those.” And, would Kroger consider the possibility of acquiring stores that may be divested, a clear reference to possible overlap divestitures that the FTC might mandate in light of the recently announced Cerberus agreement to acquire Safeway? “We’ve been happy picking up assets when they become available in markets where we currently operate, and those have been very beneficial for us,” Schlotman noted. “But it would be complete conjecture until they (the FTC) start the review process and figure out what they may have to dispose of. They must still have conversations with the FTC before they decide what assets would become available, and if there are attractive assets in markets where we operate and they fit nicely with our footprint, we’ve long said that those kinds of deals have been great for us. But we’ll wait to see what that chapter says when it get written.